ONGC: Lower write offs, higher sales volumes benefit Q1::Centrum

Lower write offs, higher sales volumes benefit Q1
ONGC reported better than expected performance during Q1 owing to lower
dry well write offs, higher crude and gas sales volumes, rupee depreciation and
higher other income despite higher quantum of cess. ONGC’s net crude
realisation during Q1 stood at US$46.6/bbl and it shared Rs123.5bn subsidies
with OMCs. Discoveries in Western Offshore fields has the potential to produce
over 60,000bpd (3.0mmt) by 2015. Although near term volumes remain
stagnant, we believe ONGC’s efforts to increase crude and natural gas
production from its domestic fields through EOR/ IOR techniques and new
discoveries will start yielding results from FY14 onwards.
Revenues buoyed by higher volumes and favourable exchange rate:
ONGC reported 24.0% YoY jump in revenues at Rs200.8bn backed by higher
sales volumes and rupee depreciation.
Crude production at 5.6mmt, natural gas at 5.9mmt: ONGC’s own crude
production declined to 5.64mmt from 5.78mmt while JV production increased
to 0.90mmt from 0.81mmt owing to increased production by Cairn. Natural
gas production too declined to 5.93bcm from 6.03bcm which is likely to be
normalized in Q2.

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Dry well write offs decline: Dry well write offs declined from Rs29.8bn in Q4
to Rs9.3bn in Q1 while depreciation and depletion jumped to Rs19.8bn from
Rs16.3bn due to higher production from Cairn. ONGC’s subsidy burden for Q1
stood at Rs123.5bn. Lower dry well write offs, higher crude and gas sales
volumes, rupee depreciation and higher other income led to 48.4% YoY and
7.7% QoQ jump in PAT at Rs60.8bn.
New discovery in Western Offshore to add over 60,000bpd (3.0mmt) by
2015: ONGC’s standalone performance was superior in Q1, but OVL’s O+OEG
production was down 22.7% YoY at 1.8mmt which is a matter of concern.
Production is expected to come back to normal over the next couple of
quarters but performance of FY13 is likely to suffer. Currently the D1 field in
Western Offshore is producing about 12,500bpd which is likely to increase to
27-30,000bpd over the next 1.0-1.5yrs and subsequently to 60,000bpd
(3.0mmt) by 2015. This assures a rise in ONGC’s standalone production (both
oil and natural gas) over the next couple of years. The stock is available at
11.5x and 9.4x FY13E and FY14E consolidated EPS of Rs24.3 and Rs29.9. We
value ONGC at 11x FY14E EPS of Rs29.9 and maintain ‘Buy’ rating on the stock
with a revised target price of Rs329 (earlier Rs313).